Balanced View on HDFC Bank - Analyst Blog

By: Zacks.com

Posted: 12/31/2012 2:00:00 PM

Referenced Stocks: HBC;HDB;IBN

We are have maintained our long-term 'Neutral' recommendation
on
HDFC Bank Ltd.
(
HDB
). The decision is based on the company's impressive fiscal
second-quarter (September 30) results. However, continuously
rising operating expenses and increasing competition in the
retail space remain the major causes of concern.

HDFC Bank's Retail Banking segment is expected to be the main
driver for earnings growth going forward. Given the boom in the
Indian retail credit market and HDFC Bank's extensive branch
network, the company is expected to gain significant market share
in the retail credit sector.

Further, HDFC Bank's main strategy is to enhance its market share
in India's banking and financial services areas. The company has
been able to execute this plan through developing new products,
conducting disciplined credit risk management and delivering
exceptional service to its customers.

Additionally, HDFC Bank's net income has been growing steadily.
The bank remains focused on maintaining earnings augmentation
through conservative risk-management techniques and low-cost
funding while not relying much on volatile sources including
trading and investment banking income.

On the flip side, the competition in the retail segment has
intensified due to the re-entry of various competitors. The
company mainly competes with other private banks in India such as
ICICI Bank
(
IBN
), UTI Bank, IDBI Bank, IndusInd Bank and state-owned banks, as
well as foreign banks that have a notable presence in the
country, including Citibank,
HSBC Holdings Plc
(
HBC
) and Standard Chartered.

Moreover, increasing operating expenses are expected to drag down
HDFC Bank's bottom line in the upcoming quarters. Moreover, like
most of the Indian banks, the bank is expected to encounter
higher cost of funds as it would be necessary for it to raise
deposit rates to meet the increasing loan demand.

Currently, the shares of HDFC Bank retain a Zacks #3 Rank, which
translates into a short-term Hold rating.